Interconnection of Fiscal Policies on Sustainability of Public DebtInterconnection of Fiscal Policies on Sustainability of Public DebtInterconnection of Fiscal Policies on Sustainability of Public Debt

This paper investigates the interconnection between certain fiscal policiesin achieving a sustainable level of public debt. The fiscal policies that areinvestigated relate to the consumption tax rate, the income tax rate, and topublic spending. The paper focuses on the critical level of public debt-to-GDP ratio, for which if the ratio exceeds this level at time 0, then it divergesto +∞ as time passes. The paper theoretically examines how the criticallevel depends on the fiscal policies, and reveals some merits of consumptiontaxation. As the consumption tax rate increases, so income taxation andcutting public spending become more effective in sustaining public debt.